Assume that Home can produce two goods, apples and bananas. The unit labor requirement in apple production is 4, while it is 2 in banana production. Foreign’s unit labor requirement for applies is 8 and it is 2 for bananas. Assume that when these countries trade, Home specializes in apples, Foreign specializes in bananas and the world relative price of applies (PA/PB) = 2.
a. If these countries trade, which country will have a higher wage? Why is this the case?
b. Using a numerical example for prices, show how wages are derived in each country when they trade with each other.